Section 4- Confusion or Merger of Rights Article 1275.

Concept of Confusion Confusion- the merger of the characters of creditor and debtor in one and the same person by virtue of which the obligation is extinguished. Requisites: 1. The merger of the characters of creditor and debtor must be in the same person 2. That it must take place in the person of either the principal creditor or the principal debtor 3. That it must be complete and definite - Doesnt mean that entire obligation is extinguished; it is the character of the debtor and creditor Kinds: 1. Cause or constitutions- Inter vivos or mortis causa 2. Extent or effect- Total or partial May be partial: 1. When the confusion or merger refers only to a part of the obligation 2. When the obligation is joint Article 1276. Effect upon Accessory Obligations Confusion or merger of rights will take place in the person of either

the principal creditor or the principal debtor: - Extinguished; principal and accessory obligation Confusion or merger takes place in the person of a subsidiary creditor or debtor (e.g. Guarantor) - The principal obligation is not extinguished Article 1277. Effect upon Collective Obligation - Doest not extinguish a joint obligation - Only up to the share Effect of Revocation of Confusion - Revoked by presence of: 1. Causes for rescission 2. Annulment 3. Nullity or inexistence of contract 4. Special cause like redemption Section 5: Compensation Article 1278. Concept of Compensation Compensation- as a mode of extinguishing in their concurrent amount those obligations of persons who in their own right are creditors and debtors of each other Advantage over payments: 1. Facility of payment because it takes effect by operation of law 2. Guaranty for the effectivity of credit

Book: distinctions Kinds of Compensation: 1. Legal 2. Voluntary 3. Judicial Effect: 1. Total 2. Partial Article 1279. Requisites of Compensation Requisites: 1. There must be two parties, who, in their own right, are principal creditors and principal debtors of each other 2. Both debts must consist in money, or if the thing due are fungibles (consumables), they must be of the same kind and quality 3. Both debts must be due 4. Both debts must be liquidated and demadable 5. No rentention or controversy commenced by a third person 6. Must not be prohibited by law Requisites (party): 1. They must be creditor-debtor to each other 2. They must be bound as principals Article 1280. Right of Guarantor to Set up Compensation - The payment of the debt is demanded from him, may set up compensation, not only for

what such creditor owes him, but also for what such creditor owes his principal debtor Article 1281-1282. Voluntary Compensation - Compensation may be total or partial Voluntary Compensation - Parties may agree upon the compensation of debts which is not yet due Example: A owes B Php 10,000 due on 1/5/2011 B owes A Php 10,000 due on 1/31/2011 - On 1/05, it is the prerogative of B, not A to opt for voluntary compensation Article 1283. Judicial Compensation - In reality, what is set of against the other party is a counterclaim. - It must be remembered that a counterclaim must be pleaded to be effectual; whereas, a compensation takes place by mere OPERATION of LAW Article 1284. Rules in case of Recissible or Voidable Debt - Defective until annulled; thus, they can still be compensation by each other Article 1285. Effects Assignments of Rights of

Assignment: 1. Assignment of the credit the consent of the debtor 2. Assignment with knowledge but without consent of the debtor 3. Assignment without consent of the debtor Situation 1: A owes B Php 10,000 B owes A Php 2,000 B assigns his right to C Situation 2:

with the the the

A assigned his right to C on November 12 without the knowledge of B and learned the assignment only on Nov. 16. How much can C collect from B? C cant collect anything from B Article 1286- 1288. Debts which cannot be compensated Kinds of debts or obligations which are not susceptible for legal compensation: 1. Depositum- purpose is for safekeeping; not loan a. Not a bank depositbecause in this situation what is created is a debtor creditor relationship 2. Commodatuma free concession of a property; borrower and lender relationship 3. Claims for support due by gratuitous title- support in arrears can be subject to compensation; what is prohibited is current and future 4. Obligations arising from criminal offense- the victim is the only one who can ask for compensation (not the accused) because it is imperative 5. Certain obligations in favor of the government, such as taxes, fees, duties and other of a similar nature Because these based on: obligations are

A owes B Php 1,000 due Nov. 1 B owes A Php 2,000 due Nov. 10 A owes B Php 1,000 due Nov. 5 A assigns his right to C on Nov. 12. A notified B but the latter did not give his consent to the assignment. B can ask for compensation up to Php 1,000. At Nov 12, the first two had already become demandable, thus compensation may happen by operation of law, because when all the requisites of compensation are present it can automatically happen. Situation 3: A owes B Php 1,000 Nov 1 B owes A Php 2,000 Nov 10 A owes B Php 1,000 due on Nov 15

1. Trust and confidence 2. Self Preservation Article 1289-90. Effect of Compensation - Several Compensation o Order of compensation o Application of payment rule (REMEMBER!) Declaration of debtor What is issued in the receipt of the creditor What is more onerous If all are equal, pro rata - All requisites are present= operation of law; even without the effect and knowledge of the parties Accessory Obligations: - if principal is extinguished, the accessory will follow; will vary depending if its partial or total Section 6: Novation Article 1291. Concept of Novation Novation- is the substitution or change of an obligation by another, resulting in its extinguishment or modification. Obligation may be modified by: 1. Changing their object or principal conditions 2. Substituting another in place of the debtor

3. Subrogating a third person in the rights of a creditor Distinctive feature- although it extinguishes the obligation, it also gives birth to another obligation Requisites: 1. A previous valid obligation 2. Agreement of the parties to the new obligation 3. Extinguishment of the old obligation 4. Validity of the new obligation Broad Concept: 1. Extinctivewhen an old obligation is terminated by the creation of a new obligation that takes the place of the former a. Changing the object or principal condition (objective or real) b. Substituting the person of the debtor c. Subrogating a third person in the rights of the creditor (subjective or personal) 2. Modificatory- when the old obligation subsists to the extent it remains compatible with the amendatory agreement Kinds of Novation: Essence: 1. Objective or real-refers to the change either in the cause, object or principal conditions of the obligations

2. Subjective or personal- refers to the substitution of the person of the debtor or to the subrogation of a third person in the rights of the creditor a. Passive- substitution of the person of the debtor b. Active- subrogation in the rights of the creditor 3. Mixedcombination of objective and subjective novation Form or Constitution: 1. Expressdeclared in unequivocal terms that the old obligation is extinguished by a new one which substitutes the same 2. Tacit- when the old and new obligations new obligations are incompatible with each other on every point Extend or Effect: 1. Totalextinguishment 2. Partial- modification absolute

1. Expressso declared in unequivocal terms 2. Impliedevery point incompatible with each other RULE: Novation by presumption has never been favored Animus Novandiintent to substitute a new obligation for the old must be clearly established or b their acts are too clear or unequivocal to be mistaken Delegation- does not operate a novation; unless the creditor has expressly declared that he intends to discharge with the delegating debtor and during the time of delegating the latter was not in open failure or insolvency Express Novation- it can only take place when the contracting parties disclose that the object in making the new contract is to extinguish the old one. o Signing of a second promissory notenot novation Implied Novation- it is imperative that the old and the new obligations must be incompatible with each other on every point 1. Object 2. Cause 3. Principal condition Test of Incompatibility- it to determine whether or not both of them can stand together ach having its own independent existence

Change of cause- may be a form of novation Change of principal conditions- not incidental nor accidental - Executes another instrument reiterating or ratifying his obligation to the creditor; ninor changes in the form of payment; additional facilitiesNO NOVATION Article 1292. Extinguishment Form of

No implied novation in the following cases: 1. Second contract provides for another method of paymentb 2. Additional security 3. Postponement of the date of payment 4. Creditor receives a guaranty 5. Accepts payment from a third person who has agreed to assume the obligation, so long as there is no agreement that the first debtor shall be released from responsibility 6. Where a surety bond is filed 7. Third person who has assumed the obligation merely becomes a co-debtor or surety Implied novation: 1. Change of the parties 2. Amount 3. Date or maturity- only in the reduction or decrease in the duration of the obligation Article 1293. Substitution of the debtor - Must be with the consent of the creditor Forms: 1. Expromision- substitution with the consent of the creditor; 1. Substitution with the consent and knowledge of the debtor or 2. Substitution without the knowledge or against the will of the debtor Requisites:

a. The initiative for the substitution must emanate from the NEW debtor b. Consent of the creditor to the substitution
2.

Delegacion- substitution of debtors is effected with the consent of the creditor at the instance of the old debtor with the concurrence of the new debtor Requisites: a. The initiative for the substitution must emanate from the OLD debtor b. Consent of the new debtor c. Acceptance by the creditor

In both substitutionconsent is necessary

creditors

Effect of payment of new debtor - Original debtor shall reimburse to the new debtor whatever benefits he may have derived therefrom Expromisionrules regarding payment of a debt by a third person Substitution is with the knowledge and consent of the original debtor; payment is made by the new debtor and with or without the knowledge and consent of such original debtor

- Demand the reimbursement of the entire amount - Subrogated in all of the rights of the creditor Substitution was effected with the knowledge and consent of the original debtor; payment is made without the knowledge and consent of the original debtor - Can only demand reimbursement insofar as the payment was beneficial to the original debtor - But he cant be subrogated in the rights of the creditor Payment is made with the knowledge and consent of the original debtor - Can still demand reimbursement from the orginal debtor of the entire amont which he has paid - Subrogated in all of the rights of the creditor Delegacion- shall be regulated by the agreement of the parties; absence of which- rules regarding payment of a debt by a third person Payment: - reimbursement from the orginal debtor the entire amount - Compel the creditor to subrogate him in all of his rights

Article 1294-95. Effect nonpayment by new debtor

of

GEN RULE: novation by substitution of the person of the debtor whether by expromision or by delegacion has the effect of releasing the original debtor from his obligation to the creditor EXCEPT: if the new debtor becomes insolvent Expromision: the new debtors insolvency or nonfulfillment of the obligation can never result in the revival of the original debtors liability to the creditor (NCC) With the consent- revive the original debtors liability Delegacion: 1. When the insolvency of the debtor was already existing and of public knowledge at the time when the original debtor delegated his debt 3. when the insolvency was already existing and known to the debtor Article 1296. Effect upon Accessory Obligations - accessory is dependent on the principal - EXCEPT: o If there was a stipulation to the contrary favoring a third person which may be demanded separately

from the obligation

principal

Article 1297-98. Effect if New and/or Old Obligation are void. In order to effect the novation, it is essential that the obligation must be valid In old obligation is voidable: 1. Annulment of the obligation may be claimed only by the debtor a. If expromision is usedthe original debtor can still raise this defense 2. Ratification of the obligation Article 1299. Effect if old obligation is conditional - Both resolutory and suspensive condition- the new obligation shall be under the same condition unless otherwise stated - READ BOOK Article 1300. Novation by subrogation (3) - Two forms: legal and conventional - Legal is not presumed: unless expressly mentioned in the code - Conventional: must be clearly established Article 1301. Conventional Subrogation - Requires the consent of the original parties and of the third person - Agreement is essential

- If the creditor, without the consent of the debtor, transfers his rights= there is no novation but mere assignment of rights Convetion Assignmen al t Rules Article Aritcle governing 1300-1304 1624-27 Necessity Required Not of debtors required consent Effect Extinguish Transmitti upon ing the ng the Obligation old; rights of establishin the g a new creditor one without modifying or extinguishi ng the obligation Effect Defects or Not cured upon vices vices are cured Time of From the Moment of effectivity moment notificatio n Article 1302. Legal Subrogation GENERAL RULE: Legal subrogation is not presumed EXCEPTIONS: 1. When a creditor pays another creditor who is preferred, even without the debtors knowledge 2. When a third person, not interested in the obligation,

pays with the express or tacit approval of the debtor 3. When, even without the knowledge of the debtor a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latters share Article 1303-04. Subrogation Effect of

Total Subrogation - Transfers all of the right which the original creditor had against the debtor or against third persons - Accessory obligations are not extinguished o Rule is absolute in legal subrogation o Rule may vary in conventional subrogation Effect of Partial Subrogation - Rights with respect to the remainder are not affected by the subrogation o Therefore, both rights will exist o In case of conflict, the real creditor is preferred